It has been 3 years and 10 months since the start of the national recession as dated by the National Bureau of Economic Research. National measures of economic activity and labor market health continue to remain remarkably low, but how should we analyze how the local economy has responded to the “Great Recession”?

A common approach is to see how local economic data compares to the national average, but this might not be as indicative of our local recovery as first thought. For example, currently the national unemployment rate is 9.1% while the average tri-county unemployment rate is 9.5%. Does this mean the local economy is having a worse recovery than the national average? Maybe. But the local economy has a much different composition than the national average. So should we expect that it will always have a lower unemployment rate?

We feel an important comparison to make is between current conditions and conditions of the past local economy. Last month we pointed you to the Cooley-Rupert Economic Snapshot that uses the same idea. In the next few weeks, the EFP blog will do a similar analysis with local data for San Luis Obispo, Santa Barbara, and Ventura county.

As frequently noted in the national press, the depths of this recession can be clearly seen when looking at the health of the labor market. A common metric of this health used in the economics profession is to look at employment. The graph below depicts the employment population ratio with data as released by the California Employment Development Department.  The ratio is defined as the number of employed persons divided by the total non-institutional working age population (16-65). It allows us to evaluate the size of the labor market, including those who are out of the labor force.

The graph shows where the ratio is relative to it’s value at the peak of business cycle activity for the last three recessions (or cycles). The current recession is depicted in blue. For example, 46 months after the start of the current recession, Santa Barbara County’s employment population ratio is 5.6 percent below its value in December 2007 (the start of the recession). Graphing the data this way allows us to compare how Santa Barbara County is doing relative to its past performance over a business cycle.

So whats to take from this graph? Well, Santa Barbara County’s labor market looked to be doing ok for about the first year of the national recession. In fact, it looked to be on the same track as it was in the 2001 cycle. Then around November 2008 the trend took a different turn. Over the next year, the employment population ratio decreased roughly 5.5 percentage points to around the level it remains today. The trend has a similar shape as it did over the 1990 cycle, not quite as deep. The interesting thing is this ratio is lower now than it was at this point during the last two recoveries and is still declining.

What exactly is going on with employment? Why the drastic change in its trend during the recovery? To look at this ratio closer, we can decompose the employment population ratio into two separate components, a labor market participation component and an employment component.

The employment to labor force ratio measures the percentage of people in the labor force (employed + unemployed) that currently have a job. It is a measure of participant success. The labor force participation rate captures notions like discouraged workers. It calculates the percentage of working age adults that are either employed or unemployed. Graphed below are these two components. Instead of showing the employment to labor force ratio we plot the unemployment rate (one minus the employment to labor force ratio). Decomposing the employment figure into these two components lets us examine where exactly the labor market is struggling.

So why was the employment population ratio flat for a year until is experienced a decline? The two graphs above imply that it was because people continued to participate in the labor market at an increasing rate two years into the recession despite the fact that labor market participants were unemployed at an increasing rate. Overall, the unemployment rate increased almost immediately and kept doing so for well over two years. The shape of the recovery in the unemployment rate is similar, although much deeper, in this recession as it was in the past two recessions. It has already started to show signs of decline. However, people in Santa Barbara County began to leave the labor market around November 2009.

Since then the participation rate has continued to decline at an increasing rate experiencing a drop of about 2.5 percentage points since July 2009. To put that in perspective, that’s a little under 3,000 people leaving the workforce over this time period. While people in the labor force are seeing somewhat better results in recent months, participation is still declining. Overall the size of the labor force is shrinking because of historically bad unemployment and because people are leaving the labor market all together.

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